[quote=Scarlett]I agree with you
[quote=Arraya]There is NO recovery next year. We should be in for the largest economic contraction for at least hundred years and it will be global.[/quote]
I believe that IS the most likely scenario but in this case – what do you think would happen to the rates and the house prices in the next FEW years? I would think they’d keep the rates low, no more than 1-2% increase in the next FEW years, and the prices might fall a little. Any other thoughts for THIS scenario?[/quote]
The bond market controls rates not the Fed. When inflation is a problem the bond market will let us know. I think prices will get cut in half again. There is too many losses that will eventually be recognized and way too may job losses in the pipeline. They can’t play hide the salami forever. If printing were a cure all the banks would be cleaned up by now . As they stand now, they don’t know what to do with there ever worsening balance sheets, except lie and hide the truth.
The bond market is far more powerful than governments at this point. While the international debt financing model remains, the bond market will retain its power to prevent money printing. Even though governments are not succeeding in increasing the effective money supply for reasons already discussed, they are nevertheless increasing systemic risk with their activities.
This is a recipe for very much higher interest rates as a risk premium. Governments do not set interest rates, they decide what rate to defend, but if that rate is substantially different from what the bond market requires, then defending it would be ruinous.
I think we are headed (not imminently but eventually) for a bond market dislocation, with nominal interest rates on government debt spiking into the double digits. This will amount to hitting the emergency stop button on the economy, especially since real interest rates will be substantially higher (the nominal rate minus negative inflation).
I am in fact expecting interest rates on private debt to rise before we see problems in the market for government debt, as the latter should benefit substantially in the shorter term from a flight to safety. The risk premium on private debt is already rising, which is a serious danger signal for such thoroughly indebted societies as we see in the developed world.
